What do investors want from a payment spin-out?

For many enterprise merchants their payments processing units are a big cost centre, but what does a spin-out require to be credible for investors and what are the pitfalls? 


For many large merchants their transaction volumes range from 500m pa to 1.5bn, they handle turnover from €10bn – €30bn and POS estates from 10k – 50k. They may also run ATM estates and manage substantial card bases.  These are typically carefully architected to provide levels of availability that many PSPs would struggle to match. But what makes a business unit credible for potential investors, and what are the potential pitfalls, to allow large merchants to follow the lead of eBay/PayPal and Carrefour/Marketpay? 

Transforming a payments processing department into a commercial company and selling a share has many attractions.  Payments M&A over the past 10 years has reduced the number of strategic buyer and Private Equity targets, so there is a pent-up demand for large low risk, high volume businesses. 



So, what criteria should merchants use to determine if it is worth considering a spin-out? 


  1. The operation needs to be made a free-standing business unit, easily decoupled from Group IT and shared services.  Many merchants already use the business unit model to develop and deliver services to internal users, often operating to commercial SLAs for IT processing and customer service. 
  2. The unit should already be a  card scheme member or easily be enabled to join.  The use of scheme membership to self-acquire POS/ATM and possibly self-issue cards, enables substantial revenue generating capability given the commoditising of simple pure-play processing.  For eComm only players, use of an acquirer PF arrangement has similar potential. 
  3. Ownership or plans to own its core payments processing infrastructure in-house (plus associated intellectual property) which could involve components such as middleware, reconciliation, and reporting and ideally plans for licensed software for the switching acquiring and issuing engines. 
  4. The ability to deliver a complete best in market, competitive, end-to-end service for acceptance for both F2F and eComm, including omnichannel at low-cost pricing for both processing and acquiring. 
  5. Have in place an experienced leadership team with a good track record of growing and running a large payments business able to pitch for new business amongst the EU’s largest markets. 
  6.  A compelling enterprise proposition for the T1/T2 enterprise market based on solid acquiring and opportunities market research. 
  7.  The last and most important will be the offer of a long term 10-year contract with parent Group to deliver its payments processing services, as well as a commitment to hold a substantial investment in the privatised business.  


Transforming an in-house processing department to meet the investor requirements can be difficult and it will be very important to avoid several damaging pitfalls.  These are potentially significant and include:


  1. The new business will be competing in a crowded enterprise market with several highly sophisticated acquirer gateway competitors who have built and own their delivery platforms and who offer a wide range of highly parametrised payments application features, APIs and VAS.  Thus, flexible integrated architectures and APIs must be within product scope. 
  2. Carved out businesses are built around a customised middleware, switching and processing requirements of the parent Group owner they are often a poor market requirements fit for new enterprise clients. 
  3. Sometimes merchant payments units use multi-vendor delivery platforms and potentially the new carved-out business may find several suppliers have become competitors
  4. Solutions can be too tailored to the needs of specific verticals where potential customers are competitors of the previous parent firm and are therefore unlikely to sign-up for the service offering. It is therefore vitally important to build application features that will support several vertical sectors. 
  5. Finally, the enterprise merchant sector is highly competitive, often making marginal contributions to a payments business.  A realistic 5-year sales plan should include investment to build offers for T3/T4 clients who typically generate profitable acquiring revenues. 


A payments processing carve out is a big vision concept which can enable the monetisation of a very valuable asset attractive to many potential investors.  Provided merchants proceed with caution, a solid Board business case can be constructed particularly by the largest supermarket multi-brand players which will produce a significant upfront cash payment and generate substantial ongoing dividend revenue streams. 


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